Same Old, Same Old

Times, they may be a changin’, but it is difficult to tell by watching the bond market. New issues usually dominate bond market news and that continues to be the case. Corporate bond issuance continues on a tear while municipal bond issuance focuses on refinancings. Interest rates remain low.

Fortunately we are not dependent upon new bond issuance. Somehow, some way, we continue to find worthwhile municipal bonds to buy almost every day. Yes, it would be nice to turn smaller pieces into larger pieces but it seems to me we are taking advantage of opportunities in the municipal marketplace. Regardless, I am confident things will change.

Interest rates do remain low. I say this tongue-in-cheek in deference to the stock market. For stock investors, bond yields will almost ALWAYS appear low…if not too low. But interest rates and their trends are changing and the implications for all financial markets, I believe, are huge.

Interest rates on a number of European bonds are negative, yet US Treasury yields remain positive. Some yields for ten year Euro bonds are negative; US Treasury ten year yields recently are around 2.25%. Investors in US Treasuries have not only a gargantuan yield compared to these Euro bonds, the Treasuries have had the trend of an appreciating currency to boot. Yet despite the favorable positive yields and currency, US Treasury notes are trending lower in price.

To try and make sense of bond prices is to invite frustration and confusion. One must seemingly suspend all rationale. It is what it is; thank you central banks of the world!

Bond pricing makes no sense and this should be a strong clue that risks and rewards are probably also screwed up. Just think about the sales pitch to buy a negative yielding ten year Swiss bond. You invest your money and you will receive less lately…safely (these are Swiss bonds after all!). We can’t guarantee you will receive less because you may receive a lot less! One could probably add a guarantee to the pitch: You will definitely receive less, guaranteed, if you hold the ten year bond to maturity.

In the world of bonds, US Treasury securities appear to be out of this world. If you are looking for 2%+ for ten years or 3%+ for thirty years, there is the US and…Greece. Why this is the case is anyone’s guess. Anyone can make up a reason why worldwide government yields are what they are and almost anything would pass as plausible. There is no answer; it is what it is!

As investors we must remain cognizant of the trends because there does seem to be a time when, bam, the prices change significantly making investment decisions quite tough. Gold, Oil, the Euro and now Bonds, peaked and changed their price trend. Usually the change was slow in coming and often stagnant pricing seemed to lull investors into complacency…then bam.

The reason I watch US Treasuries is because they are the bellwether. They could be trading at negative yields today, but they are not. They could be trending higher in price as they have for the past thirty-plus years, but they are not. But they do remain a full faith and credit obligation of the US and every other bond in the marketplace is not. Push may never again come to shove, but I believe it will and when it does the primacy of US Treasuries will wreak havoc across all bond markets as well as the stock markets.

We purposefully moved out of longer-term bonds in the past because I believed the day would come in which prices no longer trended higher. That day has come…and gone. Total debt outstanding has never been greater. Investors have traded cash for bonds and they may have assumed the trend to higher bond prices would continue. We don’t have that worry. We continue to find bonds which make sense in a dramatically changing world today and tomorrow.